Late payment is a major concern for Maltese businesses. Statistics recently compiled by MACM - the Malta Association of Credit Management - show that although cheques returned unpaid are decreasing, thanks to the due diligence by the local banks, overdue accounts are on the increase. This scenario may affect the cash flow of businesses to the detriment of the Maltese economy at large.
To assist its members, MACM conducts a regular exercise across all industries to determine the DSO of every industry in Malta. The DSO Ratio - Days Sales Outstanding Ratio - is a tool widely used by businesses in all five continents to measure the performance of the credit management function. It represents the average time taken by customers in settling their invoices due to their suppliers. Hence, it is a good financial ratio for businesses to benchmark their credit performance with that of their respective industries.
The DSO Ratio varies widely from one industry to another and Malta is no exception, with 49.5 days for the telecom industry up to 179.3 days for the industrial equipment industry. The average DSO of the local market as a whole is 78.5 days.
These figures suggest that the local businesses should manage their overdue accounts in a more meticulous and scrutinised manner. MACM advocates that being proactive is critical when granting and managing credit. Every credit facility should be supported by a proper credit application form. This should include all the pertinent information that is required by the credit manger to analyse the credit worthiness of the customer. An agreement specifying clearly the credit terms and other conditions of sale should be signed by both parties before credit is granted.
The credit worthiness analysis should be made not only methodically but also exhaustively using a reliable, efficient and structured credit management information system that would assist the credit manger to take profitable credit decisions at a cost effective manner.
Once a sale on credit is agreed to by the two parties, an invoice should be issued promptly to the customer. It is suggested to keep the invoice document neat, with no advertising clutter, showing clearly the date of the invoice, description of goods supplied, the amount of the order including VAT and discounts if any, and the payment terms. Other legal data should also be included.
It should be reminded that in business-to-business transactions, the supplier has the right to claim for expenses incurred to collect overdue money and to charge interest on the amount overdue at seven per cent, plus the ECB intervention rate as per EU Directive 2000/35/EU which came into force in Malta by LN233 of 2005. Although it is not obligatory, this legal right is suggested to feature as a caveat in the invoice document.
Overdue customers should also be served with a statement on a monthly basis. The statement of account should be easy for customers to identify and match data, highlighting overdue items prominently and encouraging customers to make payment and return these statements signed.
Local firms who are members of MACM have 24 x 7 access to the MACM Credit Management Information System by which a supplier would be able to analyse scrupulously the credit worthiness before and after credit is granted to customers. MACM also provides a number of sample documents, including a credit application form, invoice, statement, collection letters and other credit documents which assist a firm in the granting and managing of credit.
Nonetheless, an effective strategy should be in place to manage and monitor overdue accounts with the aim being to maintain a good customer relationship and sustain competitive advantage in the market.
To focus the resources of the credit function where they pay most, it is recommended to segment the overdue customers by using their payment behaviour as criteria. Customer segmentation helps to understand better the reason why customers are failing to pay on time. Overdue customers may well be segmented under three main categories:
1. Customers who only pay when reminded:
Customers who may not be organised or sluggish in their Accounts Payable function.
Customers who may be extending credit from their suppliers as a form of short-term financing.
2. Customers who only pay when specific issues or disputes are resolved:
Customers who don't pay due to any disputes with the supplier.
Customers who may not be able to pay when due but can and will pay in the near future.
Customers who cannot meet their liabilities and will eventually file for bankruptcies.
3. Customers who are not cooperative; do not honour agreements or may even go bust before they pay:
Customers who try to avoid payment.
Customers who may have fraudulent trading scope.
The first category of customers requires constant contact and reminders. It is recommended to build good rapport with the person in charge of payments. These are customers who should be supported in order to keep them current and buying.
The second category of customers may be more time consuming as they require the supplier to understand their concerns. Disputes should be settled immediately to sustain good customer relationship and build brand equity of the firm. In this category, one may find overdue customers who have been profitable customers in the past - they mean well but cannot meet their liabilities and may eventually file for bankruptcy. Suppliers should supply goods to these customers only on Cash on Delivery basis and provide these customers with any expertise whenever possible to help them recover.
With the third category of customers, suppliers may decide to take legal action - The Lawyer may file a claim at the law courts. A fast track judicial process exists if the amount claimed falls under a specified threshold - a Judicial Letter (166A) will be filed and the debtor will be notified by the law court. If the debtor does not file a note of contestation within 30 days, the supplier will be rewarded an executive title.
Managing the risk associated with credit should improve late payments and consequently would result in better cash flow and profit. However, this would entail skilled people in the field of credit management and a reliable credit management information system.
Mr Busuttil is director general of the Malta Association of Credit Management.
The Malta Association of Credit Management (MACM) is a not-for-profit organisation, providing a central national organisation for the promotion and protection of all credit interest pertaining to Maltese businesses.
MACM represents the credit profession across all economic sectors. It is a centre of expertise for all matters relating to credit management in Malta. MACM offers a range of services to the local creditors, including credit management information systems, credit management education, training, conferences, seminars, and lobbying activities.
MACM is the ICM (UK) accredited Training Centre for Malta and it is member of the Federation of European Credit Management Associations - FECMA. MACM is the distributor of Graydon International Credit Rating Reports in Malta.
www.macm.org.mt